This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the bottom of any article.

October 26, 2011

Building an Offensive & Defensive Strategic Plan

In every downturn I've witnessed, advisors who did not have systems in place to raise new money participated in the hated income-reduction plan.

It his post, I give you additional planning tips. And by the way, having a business plan is a best practice. Don’t even think about leaving home without one.

Planning is thinking through how to get where you want to go and taking precautions to ensure you don't wind up where you don't want to go. If you want to go to Las Vegas, you surely don't want to wind up in Salt Lake City.

So, you need an offensive plan and a defensive plan. Offensive is the plan that states: I'm going to Vegas, hell or high water. Defensive states: worst case, I'll stay in Salt Lake. I'm not going to Boise.

Sadly, the process of crafting and executing a business plan, especially in this industry, is more complicated than planning a trip. It's more like heading for Vegas, learning that the roads have been torn up. You head for the airport. The planes have been grounded and now you need to take a bus. And then you hear that Vegas has moved to Reno.

Your offensive plan could be: "Double my AUM in the next two years." Your defensive plan could be: "In case the market tanks have enough assets coming in so I don't participate in an income-reduction plan."

In every downturn I've witnessed, starting with 1987, advisors who did not have systems in place to raise new money participated in the hated income-reduction plan. Your systems need to go in place when you don't need them. It's like a backup system for your data. One hopes you won't need it. History tells us otherwise.

Both of your plans, offensive and defensive, should start with a number. You need a number for your offensive goal and for your defensive goal. "Double my assets" becomes "On average, add $1.6 million in new assets per month for the next two years." Think monthly, or even weekly.

To hit your numbers, you need more than a goal scribbled on a piece of paper and taped to your bathroom mirror. You need a planning process.

Your target might be: add $40 million in new assets in the next two years. But the means to achieve it are subject to immediate change without notice. Seminars that used to work now flop. The attorney who sent you $15 million in new assets a year decides to become a priest. Your best client dies and her kids, who you nearly raised, take her fortune and invest in ant farms. Your offensive plan to double your business now needs serious rethinking. You started with Plan A. Now you are scrambling to come up with Plan D.

The first two steps of the planning process go hand-in-glove. (1) Get an idea of where you want to go. (2) Figure out if it's possible to get there. (3) Now figure out your defensive plan. (4) With offensive and defensive plans penciled in, figure out how to get there. In this article, I will focus on 1, 2 and 3. In my next post, with your offensive and defensive goals penciled in, we'll figure out how to pull it off.

Let's say you have an equity portfolio of $40 million. You want $80 million. And you'd like to have it in two years. Is it possible?

In assessing whether this goal can be achieved, let's take a look at where the assets can come from. You have three choices: (1) Investment performance. (2) New assets from existing clients. These break down into three sources: assets held with other brokers, lump sums and retirement funds. Obviously there is overlap. But this is a useful way to analyze. (3) New assets from new clients. To acquire these, you need to address both relationship marketing and mass marketing.

Let's consider investment performance. I'm not much interested in using the term "market performance." Let's put the responsibility for this component of your success where it belongs: squarely on your shoulders.

To hit your double, factoring in positive performance, you need to raise between $363,000 to $1.6 million per month. Looks like a lot.

If I were in your shoes, my best-case assumption would be: performance neither giveth nor taketh away. So I need to raise $1.6 million per month. If I'm getting help from the market, I can ease off a bit.

But we also need to know worst-case. We need a defensive plan.

What if our investment performance over the next couple of years is bad? Our defensive plan is the minimum we need to be raising on a monthly basis in case the beatings resume.

Suppose your portfolios drop 5 or 10 percent annually for two years? Can you survive that? Probably, as long as your relationship-management skills are top drawer. What if it's down 20 percent for a couple of years running? Probably not.

For your defensive plan, I would say you need to assume a 10 percent downdraft, two years in a row. So to stay even, you need to raise $316,667 per month.

These calculations are not hard, just a bit tedious. I built a spreadsheet to make them. You're welcome to it. You can get it at my “Free Marketing Help” page. The link, "Free Two Year Marketing Plan." You will find the spreadsheet link toward the bottom of the page.

So let's pencil in our offensive and defensive plans. Worst case to stay even, we need to be raising $316K per month. To hit a double, if performance doesn't punish, we need $1.6 million. Big spread. The question now becomes: Can we hit the top number?

Channeling New Assets

Out in California, they have people that "channel" dogs or even deceased loved ones. That's not what we're talking about. When I say "channeling new assets" I mean identifying sources or channels of new business we can develop and manage. A channel is a stream of new assets.

There are three such channels: current clients, relationships, and mass marketing.

Very broad rule of thumb: You have 50 percent of your clients' liquid net worth. That means there's another $40 million out there. It's probably not realistic to think you can get it all. But can you get half of it? $20 million? That's $833,333 a month for 24 months.

The question now becomes: Can we get the second half of our double from relationships or do we need to do some mass marketing?

Another rule of thumb: A well executed referral marketing program should generate 10 percent of your AUM each year. Of the remaining $20 million we need, that would bring us $4 million the first year and maybe $6 million in year two. We'll pencil in $10 million from referrals. That still leaves us $10 million to raise or $5 million a year. How?